THE FATF: Lower on the horizon but still relevant

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CIMA report on CFATF progress

In the last issue of the Cayman Financial Review, Charles Jennings provided a snapshot of the major external challenges facing the financial industry of Cayman and other ‘offshore’ financial centres.

There, quite rightly, emphasis was placed on such issues as the demands for improved exchange of tax information and proposals for hedge fund regulation, which received added political traction from the fallout of the credit crunch and the global economic downturn. The OECD grey list, from which Cayman was removed in August, and the European Union draft Directive loomed large. As he made clear, the G20 was playing a critical role in the formulation of policy and in the monitoring of action in this testing environment.
 
Somewhat less visible in the course of the past year, however, has been the continued involvement and the revised priorities of other relevant international bodies including the Financial Action Task Force. It will be recalled that the FATF, created by the Paris summit meeting of the G7 in 1989, is the international standard setting body in the anti-money laundering and terrorism financing sphere. Based in – though formally independent from – the OECD, it currently comprises 32 member states and territories plus two regional bodies, the European Commission and the Gulf Cooperation Council. The Republic of Korea, which has held observer status since 2006, is expected to be elected to full membership in October.
 
While the received wisdom is that money laundering and other forms of financial crime played no significant role in bringing about the international financial crisis and the resulting global recession, the G20, both in Washington, DC, in November 2008 and in London in April of this year, has emphasised the important role of the FATF in countering threats to international financial stability and market integrity. Over the past few months the FATF has, in turn, been examining the financial crisis with a view to identifying its implications for its future work. It is anticipated that issues of transparency, international co-operation and global compliance will feature heavily in the resulting report, due to be discussed by the FATF Plenary in Paris in mid-October 2009. It is also clear that the FATF will seek to ensure that measures taken by countries to mitigate the impact of the economic crisis do not adversely affect AML controls or result in a diversion of resources away from this continuing area of global concern.
 
In April the G20 Declaration underlined the risks posed by “non-cooperative jurisdictions” and called on the FATF to “revise and reinvigorate the review process for assessing compliance by jurisdictions with AML/CFT standards”. The Task Force was instructed to report back to the G20 Finance Ministers meeting in September. In response the FATF, at its meeting in Lyon, France in late June, unveiled a new process designed to identify high risk and uncooperative jurisdictions and to ‘encourage’ them to take corrective action. Run by its International Cooperation Review Group, the first step in this process is, at the time of writing, under way; namely, a prima facie assessment of a pool of approximately 40 countries and territories worldwide, including, it is believed, some from the Caribbean and elsewhere in the Americas. The expectation is that in October the FATF will determine which of these warrants more comprehensive examination. The outcome of that next and decisive stage of the investigation is due to be made public in February 2010 in what will, in essence, be a new black list. As the FATF Annual Report, published in July, noted:
 
“This would be accompanied by an FATF call on members and other jurisdictions to apply enhanced scrutiny when dealing with transactions involving the identified jurisdictions. In addition to enhanced scrutiny the FATF will, if necessary, ultimately call for the application of ‘appropriate counter-measures’ in order to protect the financial system”.
 
That this is no idle threat is underlined by the call made by the Task Force in February of this year for the application of countermeasures against Iran given the serious concerns, which had arisen about its failure to properly address the risk of terrorist financing and its apparent reluctance to take remedial action. The measures involved can range from requiring enhanced due diligence in the conduct of relevant transactions to “limiting business relationships or financial transactions with the identified country or persons in that country”.
 
Happily, it is understood that the Cayman Islands is not among those currently subject to ICRG examination. The reasons are clear. The primary mechanism for the identification of suspected high risk and uncooperative countries and territories is based on the outcome of highly detailed mutual evaluation reports carried out by the FATF, FATF style regional bodies, and the IMF and the World Bank. This is done according to a common methodology of assessment based on existing international standards. In the case of the Cayman Islands, this review was carried out by a team of experts, including representatives from the US and Canada, acting under the auspices of the Caribbean Financial Action Task Force and was concluded in 2007. The outcome was a highly positive one, placing the territory in the top rank of formal compliance with and effective implementation of the FATFs 40+9 Recommendations; a fitting tribute to the efforts of successive governments, to the culture of compliance and co-operation, which has developed within the private sector, and to the skill and powers of persuasion of the leaders of the Cayman team at the CFATF Plenary in Costa Rica where the report was discussed and adopted.
 
While the new ICRG process itself seems unlikely to directly affect the Cayman Islands there remain strong reasons why the relevant authorities and the private sector should continue to follow the work of the FATF with care over the coming years. Of particular importance is the fact that a limited review of the existing international standards, as embodied in the 40+9 Recommendations, is now underway. Among the matters under consideration are those relating to customer due diligence, beneficial ownership, international co-operation and law enforcement. The difficult and controversial topic of whether tax crimes should be added to the mandatory minimum FATF list of predicate, or underlying, criminal offences for money laundering has also re-emerged as a subject of debate. In this context the associate membership status now enjoyed by the CFATF provides an enhanced opportunity to the governments of the Caribbean region to seek to influence the outcome of those discussions in Paris. Indeed, in a speech in Australia in July, the current FATF President, Paul Vlaanderen of The Netherlands, stressed the importance he attached to strengthening the relationship between the FATF and the regional anti-money laundering bodies, such as the CFATF and specifically looked forward to their input into the review process.
 
Over the past few years the FATF has also afforded a much higher priority to improving and deepening its co-operation with the private sector. This has been especially evident of late in the important role played by industry associations and individual businesses in the development of FATF guidance on the key elements of an effective risk-based approach to combating money laundering and terrorism financing. Here emphasis has been placed on ‘high level principles and procedures’, which both, individual firms and national regulatory authorities, may wish to consider in deciding how best to implement this approach in practice. Separate guidance now exists for a broad range of categories of obligated entities; from lawyers and accountants to real estate agents and money service businesses. These documents are public www.fatf.gafi.org and will prove to be of interest to compliance officers and others with AML/CFT responsibilities.
 
While the economic crisis has thrown up new international challenges for Cayman and other financial centres, the long established agenda items, and the bodies responsible for them, have not gone away. The FATF and its AML/CFT mandate may be less visible on the international horizon than they once were, but they remain highly relevant to the future of this and other appropriately governed and regulated jurisdictions.

FAFT